India Cuts Key Rate to Spur Growth as Inflation Cools

The central bank, seen here, added the policy guidance will be “conditioned by the evolving growth-inflation dynamic and the management of risks from twin deficits,” said the Reserve Bank of India. Photographer: Brent Lewin/Bloomberg

Jan. 29 (Bloomberg) -- India lowered interest rates for the
first time since April and cut the amount of deposits lenders
must set aside as reserves, easing policy to revive growth as
inflation cools and the government curbs the budget deficit.

The Reserve Bank of India reduced the repurchase rate to
7.75 percent from 8 percent, it said in Mumbai today, as 30 of
35 analysts in a Bloomberg News survey predicted. Governor
Duvvuri Subbarao also cut the cash reserve ratio to 4 percent
from 4.25 percent, effective Feb. 9, adding 180 billion rupees
($3.4 billion) into the banking system.

India becomes the first major Asian economy to ease
borrowing costs in 2013, after inflation moderated to a three-year low and the government called for cheaper credit as it vows
prudence in next month’s budget to damp price pressures. The
central bank cut the inflation forecast to 6.8 percent and said
there’s space, “albeit limited,” to support a faltering
economy. It estimated a record current-gap will widen further.

“The central bank was encouraged by easing inflation and
banked on the delivery of fiscal policy tightening,” said Leif
Eskesen, the chief India and Southeast Asia economist for HSBC
Holdings Plc in Singapore. “The current-account deficit is too
wide for comfort, and room for further easing would depend upon
inflation risks receding and deficits narrowing.”

The yield on the 8.15 percent government bond due June 2022
fell to 7.84 percent as of 4:41 p.m. in Mumbai, compared with
7.86 percent yesterday. The BSE India Sensitive Index fell 0.6
percent. The rupee gained 0.2 percent to 53.7938 per dollar.

The central bank added the policy guidance will be
“conditioned by the evolving growth-inflation dynamic and the
management of risks from twin deficits.”

Subbarao said at a briefing in Mumbai today that “the
message that we are trying to give is that as much as there is
some space, it’s going to be quite limited and we are going to
use it with a lot of judgment, on both the timing and the
quantum.”

The rupee has strengthened about 3 percent against the
dollar since mid-September, when Prime Minister Manmohan Singh
began a policy overhaul to contain subsidies, lure foreign
investment and speed up infrastructure projects. Singh is trying
to revive an economy expanding at the weakest pace in a decade.

Inflation Forecast

Growth will be 5.5 percent in the year through March 2013,
below an earlier estimate of 5.8 percent, the Reserve Bank said.
That would be the slowest since 2002-2003. The prediction for
benchmark inflation was cut to 6.8 percent from 7.5 percent.

Five of 28 analysts in a Bloomberg survey predicted the
reserve-ratio cut, the fifth since the start of 2012, with the
rest seeing no change. Four in the repurchase rate survey
expected a reduction to 7.5 percent and one no change.

Finance Minister Palaniappan Chidambaram said last week
he’ll stick to his target of narrowing the budget gap to 4.8
percent of gross domestic product in the 12 months through March
2014, from an estimated 5.3 percent this fiscal year.

Officials are trying to give Subbarao more room to lower
borrowing costs. They are also trying to avert a credit-rating
downgrade after Standard & Poor’s and Fitch Ratings warned in
2012 that fiscal and trade shortfalls imperil India’s
investment-grade status.

Current Account

The current-account deficit is expected to have widened in
the quarter ended December, the central bank said. It was 5.4
percent of GDP in the previous three-month period. The Reserve
Bank said it’s “critical now to arrest the loss of growth
momentum without endangering external stability.”

Benchmark inflation was 7.18 percent in December, the
highest in the BRIC group of major emerging nations that also
includes Brazil, Russia and China. The current-account deficit
was a record $22.31 billion in the quarter ended Sept. 30.

India partially freed diesel prices from state control on
Jan. 17 to curb fuel subsidies, adding to recent policy steps. A
rise of 0.45 rupees a liter every month until March 2014 will
add around 64 basis points to inflation and lower the budget gap
by 14 basis points, according to Nomura Holdings Inc.

Elsewhere in Asia today, New Zealand’s annual trade deficit
unexpectedly narrowed in December. In Australia, business
confidence for December rebounded the most since 2001.

In Germany, consumer confidence will climb in February due
to a stable labor market and higher income expectations, market
research company Gfk SE said.

In the U.S., private reports may show home prices in
November posted their biggest year-on-year advance since 2006,
while consumer confidence as measured by the Conference Board
likely weakened in January, surveys showed.